The risk and the opportunities for the free markets today - interview with Mark Littlewood

The free markets are facing a lot of challenges nowadays, from a resurgence of statism to Brexit to the recent COVID 19 pandemic and lockdown. I discussed the present risks and opportunities with Mark Littlewood, Director General of the Institute of Economic Affairs.

What are the risks and opportunities for free markets today?

I am a long- term optimist and a short-term pessimist. Generally speaking, the world is becoming inch by inch more free market and liberal and less statist and less socialist as a general rule across 7.6 billion people. This has been a major driver of economic growth in the last 20 or 30 years. In particular China and India are becoming more free market and liberal. In the developed, democratic world, it seems we are running to the buffers. Its’ not a disaster in other parts of the democratic world, it’s okay, the UK for example is growing by about 1.5% a year and this is about EU average. Italy, more of a problem, but if you look at the world as a whole, we’re still growing, but a at a very disappointing rate.

And as night follows day there’s more demands for more regulations, higher taxes and more spending around every corner. That’s not just true here in Britain, it’s the picture of the Western world. So that troubles me. If we are going to get to a situation in which 40% or so of national income is controlled by the state, then you’re going to have a very sluggish growth in the Western world. But elsewhere on the planet there’s plenty to be cheerful about, China and India are not free market liberal democracies, but they are moving in that direction. So, the world as a whole is looking good, the richest part of the world is looking less good: not disastrous, but not growing at the rate that it should, and that’s because we’ve become addicted to high taxes and high government spending. Nearly all of the economic evidence would suggest empirically that if you want to maximise economic growth in a given country (and there are other things that you might want to maximise; I am not saying that maximising economic growth is the only thing), you want a state sector that is at about 20% of national income. 20% of GDP being collected in taxes and spent, and the Western world is now getting towards 40%. Now you might think that high spending does wonderful and brilliant things, but almost certainly it is impeding economic growth. So I am kind of optimistic about the poorer parts of the world and pretty pessimistic about the rich part of the world.

About taxes- why wouldn’t a triple tax lock be sufficient?

The triple tax lock completely sums up to me why I don’t trust politicians with economics. Largely what matters, this is an oversimplification, is what proportion of your income the government is going to take. You probably don’t care very much if they are taxing your income, your cup of tea, your mobile phone, your pen or your paper, right, you care how much of your overall income is taken by the government, so what politicians  are now prone to do is to make very specific eye- catching promises or pledges and promise we’re not going to raise the tax on your cup of tea, I completely promise you, in fact, we’re going to lower the tax on your cup of tea, but what we haven’t told you is we’re going to increase the tax on your mobile phone, your pen, and everything else. So the triple tax lock: national insurance, VAT and income tax, I guess they’ll have to, they’ll probably stick to that, but don’t in any way believe they’re not going to find another way of squeezing money out of you. If they can’t touch those particular things, they will touch others, they will increase fuel tax or alcohol tax, or the tax on your property. So I think if politicians are making pledges about the overall tax burden they’ll almost certainly find another way of increasing the way you tax me. Worse still, when you make those very simplistic pledges, once you start trying to raise your revenue you are going to make the tax code even more complicated. So, one of the big problems of the British tax system is not so much the overall burden of tax (too high for my liking, at 35%,) but the fact it’s unbelievably complicated. The tax rule book is 21 or 22000 pages long, 10 million words, there’s more words in the tax rule book than the average human being reads in their lifetime, and of course it’s not much of a page turner, it’s not like reading a novel, and when they make a pledge like “we won’t increase the income tax” there will be some loophole or change that might pinch a tax relief or inheritance tax and further complicate the code. While I’m really interested in what politicians’ pledging in round terms is, you probably can’t make a complete political pledge on this, you think 35% of national income being taken by the government in tax is too high or too low and would it be higher or lower at the end of your government,  and if you want me to make a prediction I think this government would put that up a bit, I think it would probably go up to 36, 37%. The fact that they’ve promised to triple tax lock is of very little solace to me, because I’m as certain as I can that they’ll find some other way of getting more money out of me than they are at the moment.

So, a serious pledge would be on the total burden, rather than promising we won’t increase the tax on a cup of tea, or on a cup of coffee, or on a glass of water, that’s why I don’t really trust them on it. The thing going against that if you want to be a little more optimistic, it seems in the UK at the moment, and that’s maybe true in other western countries, the government is taking out of the economy almost the maximum amount it can in taxation. Actually, over my entire lifetime the government never managed to take more than 35%. The minute it tries to go higher than that it will damage the economy in some way, or capitals fly, people emigrate, or retire early, so it probably is about the maximum it can squeeze out of the population at the moment. But if they really were trying to take 5%, or 10% more out of us, you will have to start doing things that a democratic government would not consider doing, confiscating property, nationalising, so we’ve reached the point where democratic governments can’t squeeze more out of the citizens. But making a particular pledge about tax A almost certainly means you’re intending to raise tax B, so that’s why I don’t trust the triple lock, if you’re serious about taxes being frozen or going down make a promise across the board, not just on these three taxes.

Is there any potential for taking back control in way of deregulation?

Regulations, well, I’m more confident about that than I am on taxes, this government is going to tax quite high and spend quite high, I mean, nothing extraordinary. On rules and regulations, as opposed to taxes, I’m a tiny little bit more optimistic and the reason why is what you said yourself, “taking back control”  was a hugely popular refrain at the time of the Brexit referendum and that seemed to be guiding the British government approach and policy, at least to some degree, and actually in the referendum campaign here if there was one thing that the Remain side and the  Leave side agreed on, it was that too much regulation was coming out of Brussels; too many stupid rules that are hampering business, making difficult to innovate, that are petty and just about ticking a box or filling in a form rather than having any real good in the world.

So given the overwhelming majority of people seemed to believe that- I’ve not yet met anyone who said to me “no the European Union is a regulatory utopia” in which every rule is perfect-  there must be the opportunity with Brexit for Britain to deregulate at least in some areas. If we’re not going to diverge here in Britain from the EU regulatory book then what was the point of leaving, leaving can only be justified if you start to regulate in your own way and differently from the European Union. Now, shall one be optimistic about that or pessimistic about that? It depends which you think the better regulators are, the British government or the European Union, do you think that big trading blocks like the EU regulate better than relatively smaller countries like the UK, I don’t know. But I think if you are looking at an area where you might see some degree of liberalisation and the removal of regulatory burdens, then the UK after Brexit will be a good example. I don’t know in which particular area we’ll find that, but I think the government will be desperate to prove that some rules that used to be imposed upon us when we were member of the EU no longer are, I don’t know whether that will be around employment law or the regulation of tobacco, GDPR, data protection laws but at least in some areas I suppose this government is likely to find areas in which the rule book is cut back, so taxes I’m pessimistic about, regulation, all the things you need to comply and conform with, I think we can see an improvement.

I believe in very few barriers, I’m very liberal on immigration, I’d make it extremely easy for Italians to sell things Brits and Brits to sell things to Spaniards and the rest of it, but I think it is important that trading countries also compete with each other on regulations and tax, and I think that the EU’s continual refrain “we want a level playfield” is extremely dangerous. In the private sector, that would be called a cartel. In the same way private companies compete with each other on price, on quality- if you are Coca Cola you’ve got to compete with Pepsi cola on price and quality and how safe the drink is and how quickly it is delivered- you don’t set a level playing field between the two businesses, and I would like countries to be like that, I’d like continual competition between Britain and France, and Italy, or Britain and America, about who’s got the best regulation, or the least bad, who’s got the best tax regime, or the least bad.

I think there’s a danger in the EU that they want slowly but surely move to have us all the same rules, or having the same taxes, and the removal of competition between member states and other countries like Britain that will trade a lot with the EU. I think they should compete and have different regulatory environments, and the experiment would be who’s got this right, the Italians or the Brits, the French or the Germans, the Dutch or the Danes, you can continually look at other jurisdictions and see what they’ve done and if they’ve taken the right path or the wrong path.

So, competition in taxes and regulations in my view is a really vital element of bringing about a good jurisdiction, and Brexit will enable that process within Europe, and if we’re starting going our own way there’s some sort of competition, and maybe we’ll get it wrong. I believe the UK will set better regulations for itself outside of the EU, and maybe the other member states will decide to follow the British model if it’s working. It doesn’t necessarily mean they will have to leave the EU, but they will learn from the best practice. I think an opportunity of Brexit, not a certainty, is that the EU and the UK will have to compete with each other as governmental structures, and let’s see who gets it right.

What do you think of the increased role of the state in our lives in the present coronavirus crisis? Any lessons to be learnt?

Of course, as a free market liberal kind of guy I am not enthusiastic about the state running our lives, but there’s a danger we get overly worried about is that the role of the state intervention in our lives. Yes, it is dramatic, but, by necessity, temporary. Nobody is suggesting this is the long-term future of the global economy. These are unbelievably drastic measures, I am not saying that all the money being spent and all the measures imposed are correct, but it’s important to understand they are temporary, they are going to be expensive and our debt is going up, both in the private sector and in the public sector, in a context in which we were hardly in good financial health before, it’s not as if we’ve built up amazing sovereign wealth funds. We were already stretching debt and deficit to the maximum, every country is balancing, give and take, an, absolute hit, and this government spending is going to be absolutely colossal and tax revenues are going to be relatively minimal and probably for a long period of time all tax revenues. It’ s not as if the economy is going to spring back in full health in June or July, it will take a while before tax revenues are back, but I think it kind of proves that socialism can only be temporary, there is no way this can continue another three months, there isn’t the money to do that.

I hate state intervention in our lives, but the thing I am clinging onto is that everybody is going to say those were two horrific months in lockdown, we couldn’t go to work or leave the house, this is what state interventions looks like, and feels like, and we had to do it because of a medical emergency, but now it has stopped, so I am kind of deliberately determined to be optimistic here. Nobody is suggesting this is the global strategy for 2021 or 2022, forget it, it’s only bridging us over a few weeks, possibly two or three months, I’m winding that very quickly, it’s going to be important, but I think it’s also going to be the case that once we are at the other end of this, although the private sector will have suffered badly, lots of companies are going to go bust because of this and a lot of people are going to lose their jobs for this, the public sector is not going to be in rude health either, it’s going to be very, very difficult for anybody to credibly say that the appropriate policy for Italy or the UK or France or America in 2021, 2022 or 2023 is greatly enhanced government spending, because we’d have to manage an even greater debt book, so the current fiscal policies will have to come to an end soon, there’s no way we could continue with them throughout summer or into the autumn, forget it, I mean, the country goes into liquidation before then.

When lockdown starts to ease and things start, inch by inch, to return to normal people are not going to want to go back to this, unless there is a second wave, so I think you will find a reaction that the public, the ordinary people, the business, will be a huge relief, almost even perhaps a celebration that they’ve got their freedom back, so the short term implications of this are horrific in economic terms and in civil liberties terms, but once we’ve can go back to our jobs, or go for a walk in the park or a restaurant people are going to cherish those freedoms in a way that we didn’t six months ago. Perhaps the freedom that we had was really important, not things we just assume that we have, but something to cherish and protect. Even though the situation is quite bleak at the moment, I believe that the reaction will be quite a free market libertarian one, and when we get our freedoms back, we’ll cherish them more than we ever done before, at least in our lifetimes.

How about red tape?

We are seeing the state massively increasing its power, you know, police power, and the economic intervention. But there are some areas were the state is liberalising, in order to allow the economy to cope the best it can. Some good examples are in the UK, they’ve extended the number of hours a day a lorry driver can be on the road, the EU law insisted that it would be 9 hours a day, we relaxed that and now truck drivers can be on the road for 11 hrs. Another extraordinary rule was that if a restaurant wanted to offer a takeaway facility it needed to apply for specific planning permission, so if you are running a pizza restaurant or a curry house wanted the option of simply sending food to people’s homes it needed a separate government certificate. Now, these are quite small things; within the British healthcare system, my understanding is that they got rid of quite a lot of complaints on red tape, because you wanted healthcare workers to be able to act swiftly, with alacrity, without have to tick boxes and forms and being focused on actually saving lives. The other one I came across was the hours of the day in which supermarkets were allowed to accept deliveries, I can’t remember the exact limits, but it was something like supermarkets were not allowed to accept food deliveries between 10 at night and 5 in the morning, because that would be disruptive and cause noise; now  that has been scrapped, you can get food in supermarkets any time, daily or nightly. There is a case to be made that these regulations have been relaxed in desperate times, and we discover that the consequences of relaxing these regulations was not particularly harmful, restaurants are allowed to run takeaway businesses without poisoning their customers, or supermarkets being able to accept food deliveries at half past two in the morning without causing terrible noise pollution, then we should keep those relaxations in place. Government and politicians have allowed too many regulations that we didn’t need, and when you are up against it, as we clearly are at the moment, it is exposing that regulations, dozens and dozens of them were completely pointless, that were intrusive and not achieving anything. If relaxing those regulations to help the economy during these difficult times proves to be right, why not continue to relax those regulations when we return to normal, in order to try and supercharge economic growth, because the thing we’re going to have to get back very quick is a means of bringing very fast economic  growth to the entire global economy. If two or three years ago you’d asked me what do you think of this plan, it might increase GDP growth by 0.2%, I’d probably have called that a radical policy we’re not interested in doing, not transformative to increase GDP.  By the way, according to the Office for Budget Responsibility, the economy will have shrunk by 35% by the end of June we will have to find policies that bring about growth by 20% or 30% GDP.  Getting the government to lower the amount of money it’s spending is important.

But the upside silver lining is that we’ll have a certain numbers areas in which we have liberalised, and I would like those liberalisations to stick, then economic growth for the rest of 2020, and 2021 and 2022 will be that much better. Getting economic growth back into the global economy come the summer, autumn and next year is the overarching and overriding priority. We can’t just see the global economy being eviscerated by a third, that’s the equivalent in economic terms of a world war, we need to bounce back.